With a strong dollar currently depressing the precious metals prices, M Partners Mining Analyst Derek Macpherson believes that fundamentals will kick in eventually and bring prices back up. In this interview with The Mining Report, he advises investors to look for low-risk companies on solid footing and discusses some of his favorite names that are poised to come out fighting.
The Mining Report: Even at today’s very low gold prices, many—including Goldman Sachs—have warned gold could go lower still. What is keeping the gold price down? What could turn it around?
Derek Macpherson: Over the last several weeks, the gold price has been affected by the strong U.S. dollar. The U.S. economy is the least bad out there, given Europe’s marginal recovery trajectory and the sanctions levied against Russia, its key trading partner. This isn’t a flight to safety, it’s a flight to the least-bad economy. Consequently, the dollar has rallied, putting pressure on gold and all other commodities.
We typically see this correlation return when we have big moves in the dollar relative to other currencies. Once the U.S. dollar stabilizes, gold returns to the underlying fundamentals, which are more driven by macroeconomics. Our view remains that an inflation-driven gold trade is coming. Like everyone else, we’re still not sure just when that will happen.
TMR: Could gold go down further or have we hit bottom?
DM: I think we could flirt below $1,200/ounce, but I don’t think we’ll see an extended period of significantly lower gold prices. We’re getting very close to the marginal cost of production for most producers. If that situation lasts for an extended period, mines are likely to start shutting down, and it could swing back to being a supply-and-demand story.
TMR: In your March interview with The Gold Report, you said it was too soon to invest in high-risk names and suggested low-risk companies that could handle even lower gold prices. History seems to have proven you right. Do you still recommend a defensive posture, or is it time to snap up higher-risk stocks?
DM: We still have a defensive view. There are bargains out there; with the commodity price pulling off, almost all companies have seen material share price declines, both the good and the bad. That’s probably not fair, but it provides investors an attractive entry point on some higher-margin producers.
TMR: Can you give us a few examples?
DM: The first name that stands out is Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB). The company has a very high-grade asset, which allows it to have high margins. Even though the risk is a little bit higher because the company is ramping up production, its grades should allow it to retain very reasonable cash costs over the long term and tolerate much lower gold prices.
TMR: Klondex just found a new mineralized zone at the Fire Creek project. How much of an impact does that have on your view of the company?
DM: Klondex has exploration upside on both projects. At Fire Creek, the company has identified three veins that are outside the current resource, which bodes well for the pending resource update. Meanwhile, at Midas, the company recently announced an expanded resource based on some exploration results and by applying different mining methods than previous operators. Importantly, the Midas update highlights that the company has two mines with reasonable lives and exploration upside.
Before we leave the topic of commodity prices being negatively impacted by the strong dollar, I want to talk about zinc. It has not been affected because it is supported by underlying supply/demand fundamentals. One of the only ways to play the impending zinc deficit is Trevali Mining Corp. (TV:TSX; TREVF:OTCQX; TV:BVL). It remains one of the only pure-play names in that commodity. Holding Trevali is a good position to have in the mining space.
TMR: Are you excited by the commodity or by the potential of Trevali’s Santander and Caribou mines?
DM: Both. Trevali has strong commodity fundamentals and it has a strong organic growth profile. It brought Santander into commercial production earlier this year. Caribou will come online next year. Following that, Trevali’s next likely leg of growth is the potential doubling of the throughput at Santander. Then, it has two more assets in New Brunswick—Halfmile and Stratmat—to develop. Trevali is uniquely leveraged to a strong macro-environment for zinc and it has a strong organic growth pipeline.
TMR: You mentioned the importance of having defensive stocks in safe jurisdictions. What are some companies in the U.S. that would be worth looking into just for that reason?